Understanding the Meaning of Hostile Takeover Through Apt Examples

Mergers and acquisitions in business can be friendly or hostile. In a hostile takeover, the acquirer attempts to acquire the target company either by a tender offer or a proxy fight to replace the management. BusinessZeal furnishes in-depth meaning of hostile takeovers and defense strategies along with examples.

Neha B Deshpande

Last Updated: Feb 26, 2018

Did You Know?

The takeover of German company 'Mannesmann AG' by Vodafone, is one of the biggest hostile takeovers in history.

Takeovers, mergers, and acquisitions are part of corporate life. A company or organization has owners in the form of stockholders, and every management faces the threat of being taken over. However, a takeover can be friendly or hostile. For the growth of any organization, synergy benefits, etc., companies might come together and decide on an acquisition. This is a case of a friendly takeover. Such takeovers benefit the both entities. In many cases, takeover of sick companies benefits the doomed company. Such takeovers have mutually decided terms and conditions, and the interest of the minority stockholders can be bought by the other stockholders, the dissuading stockholders have their own legal rights. In short, a friendly takeover is a decision of the management, agreed by the stockholders.

The opposite of a friendly, regular takeover, is the hostile takeover, wherein, there is an attempt to overthrow the board of directors, either by buying majority of the stocks of the company, or by convincing the other stockholders to replace the management. Of course, the acquirer has to strategically takeover, by bidding a price at a premium than the market price of the stocks. This implies a huge capital investment.

Thus, to execute a hostile takeover is not easy for any acquirer, since in either case, he has to pay a huge premium over the market price, convince the other stockholders, and have a say in the market, have information from business insiders, and be strategically smart. The consequences of any hostile takeover can be negative or positive too. Of course, it is negative for the existing management, yet a change in management, might prove to be of beneficial to the organization. Its impact on the target company must be analyzed too, and though, it may seem negative at the outset, it might turn out to be positive in the long run. However, the 'shark companies' may plan to gulp down other players in the market. This results in dilution of the interests of the stockholders of the companies. Furthermore, the interest of the existing employees might be under threat in this case.

Impact of a Hostile Takeover

► Firstly, it creates a lot of chaos in the stock market, and the stockholders attempt to sell of their stocks immediately. This may result into a drop in the prices of the stocks, and the stockholder might not benefit out of the investment.

► Unlike a friendly takeover, where the stockholders are compensated and their share is taken into account for dilution of stocks, in a hostile takeover, there is a risk that the stockholder does not benefit from it. Since the management changes and the stockholder has no knowledge of the company where his investments are lying, it may happen that they (investors) reap no benefits.

► Other than the stockholders, there can be a serious threat to the company, in case the acquirer simply uses this strategy to eliminate it from the competition in the market, eating up its assets, and wiping off its goodwill and the brand name from the market. The target company loses all its identity, and the new management may bring about many changes which might not go down well with existing employees.

Known to be one of the biggest mergers in corporate history, Vodafone (Vodafone AirTouch), a UK-based company attempted to acquire 'Mannesmann AG', one of the biggest German companies, in 1999. It was the biggest battle, and controversial takeover, with strong opposition from trade unions and politicians too. The management of Mannesmann had immediately declined the offer of a merger. Efforts were taken by both Vodafone and Mannesmann to convince the stockholders to agree or decline the offer, respectively. Klaus Esser, the Chairman of the Executive Board of Mannesmann AG, believed that the offer was not in economical favor of Mannesmann, and both had completely different structures and expansion plans. However, he had to finally oblige to the stockholders wishes, since a majority were convinced by Vodafone to be in their favor. Though the takeover has been termed as hostile, Chris Gent (CEO of Vodafone) claimed that he wanted a friendly takeover for the company, and even maintained that the employees and stockholders have nothing to worry about.

There were many legal repercussions which followed the takeover, and the top management of Mannesmann were acquitted in court for corruption in the dealings.

Example # 2Acquirer: InBevTarget Company: Anheuser-Busch

The hostile takeover of U.S. beer company Anheuser-Busch, the American icon for beer and makers of 'Budweiser' by a Belgium company InBev for an amount of USD 52 billion is an interesting case study in the history of hostile takeovers. However, though it started as a hostile deal, it turned out to be friendly in the end. In 2008, the management of Anheuser-Busch had flatly refused a merger proposal, citing that the deal was not economically viable. However, the giant eventually succumbed to growing pressure and accepted the takeover. Today the company is known as Anheuser-Busch InBev. This merger came in the backdrop of the economic crisis of 2008.

A book 'Dethroning the King' based on this merger written by Juile Macintosh, describes how the beer king was taken over by a European company.

Defense Strategies

Of course, to protect the interests of stockholders from such budding acquirer(s), there are different strategies that can be implemented. Here are some combat strategies, which a company can implement, in case of a hostile attempt for a takeover. How much the defense strategies help the stockholders should also be taken into consideration.

► Poison PillThis is one of the most popular defense strategies adopted by the target company, and is synonymous to eating a poison pill, rather than succumbing to the enemy. In this strategy, the company sells its stocks to stockholders at a much discounted price, resulting in dilution of stocks, eventually, dissuading the acquirer from trying to invade the stock market, since the acquisition becomes more time-consuming and difficult in this case. Of course, the charter of the company must confer such a right of issuance to the management. If the takeover is successful, the acquirer has to pay the price by paying huge dividends over these stocks. Thus, these stocks are meant to shoo off the predators from trying to acquire them.

► GreenmailIt involves purchasing the stocks of the company at a higher price from a set of stockholders, at premium, with a standstill agreement that states that the bidder will not be able to purchase the stocks of the company for a certain period of time. This is beneficial for stockholders who are looking for short-term profits, rather than being interested in long-term profit that might result from the merger.

► White KnightIn this method, you resort to a third party, instead of accepting the hostile takeover. This is to divert the attention of the stockholders to another acquirer, and advocate that he is better than the other competing acquirer.

► Crown JewelThis is a risky technique wherein you sell off the major assets ( i.e., the crown jewels) of your company to ward off the impending enemy, so as to make the company look less attractive.

► LitigationFor a short time, you can entangle the bidder in a legal suit, by challenging the validity of the takeover; thus, helping the management of the target company to buy time for other defense strategies.

► Staggered BoardThis defense strategy is often complemented with the poison pill technique. This technique, again aims at buying more time and increasing the difficulty for the predator. Staggered Board requires you to appoint multiple directors, at different time periods; thus, the acquirer has to engage himself in convincing the stockholders for fighting more than one proxy fight.

► Super MajoritySuper majority clause requires 70-80% of stockholders' approval to pass the resolution of takeover. This makes it more difficult for the potential acquirer to convince the stockholders, than a simple majority.

► Golden ParachuteThis method discourages the takeover by offering high lucrative compensations to the top management in the event of them losing their jobs in case of a takeover.

Ethical Issues in a Hostile Takeover

► Other than the monetary and dilutions of interests of stockholders, many ethical issues that come with a hostile takeover are not taken into account. At what cost, the big sharks can prey on the smaller ones, and corporate and business ethics is at stake, when you're forcibly trying to buy something which is not for sale. What happens to the stake holders of the target company―investors, employees, suppliers, and rather even customers―cannot be predicted. The acquirer may be a marauder in disguise, attempting to overthrow the target company from business. The quality of services and products, after a hostile turnover, may decline or change for the good. Whatever it may be, a dissuading and non-consenting takeover's future is uncertain.

► Furthermore, the acquirer company incurs heavy premium costs, in a bid to acquire the other. This might be of a disadvantage to the acquirer company's stockholders. It is not necessary for an acquirer company to benefit from the takeover. It might be an unwise decision, and the company may get embroiled in a web of litigation, hampering its current growth prospects. In a bid to gain and swallow more, the death of corporate ethics is almost eminent, and the extent of monetary greed does not fail to surprise.

► Using the company structure for your own benefit, and to overthrow a business which has been carried out by generations of a family, again invokes the question of ethics. Moreover, if the current management of the company have been really doing a fair job, taking over might not guarantee the quality of products and services which the brand name once vouched for. However, of course, it might benefit the company stockholders, if the new management performs better than the earlier one. Other than that, the ethical issue of corporate politics, where heavy compensations are paid to top management for agreeing to a hostile takeover, again crops up.

Hostile takeovers continue to be a part of the business management; though there are fewer cases in today's times. For example, the 'bear hug' method, wherein the acquirer, strategically, makes an attempt to purchase the stocks of the company at such a high premium that the management of the target company is compelled to accept the bids given by the company. The management of the company has to be vigilant and on its toes to track the predators; however, such takeovers will remain a part and parcel of the corporate world.